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AMERICA’s TEN CRISES, Part 10-Growing Income Inequality

February 20, 2013 by jackrasmus

(The following is an excerpt from this writer’s forthcoming, March 2013 ‘Z’ Magazine article, ‘Income Inequality and Double Dip Recession’. For a complete version, see ‘Z’ Magazine).

The dominant characteristic of the US economy today—and a fundamental cause of the faltering, stop-go economic recovery in the U.S. since 2009—is the long term and continuing growth of income inequality in America.
Income inequality in the US is not only growing, but growing at an accelerating rate. What follows is a detailed accounting of the dimensions of the growing income inequality in the US, and some of the more important reasons for that continuing, and now accelerating, income shift. Growing income inequality—approaching now obscene levels—is not simply a ‘moral outrage’. It not only represents a gross violation of historically held American values or reasonable equality for all. It is a condition that has served, and continues to serve, as a major cause of the lack of sustained economic recovery in the US now for five years—as well as a major factor in explaining why the US continues today to drift toward another ‘double dip’ recession.

Median Real disposable household income has been declining steadily over the long term since 2000 and that decline has accelerated since 2008, at a rate between 1-2% per year. With consumption constituting 70% of the US economy, spending by 100 million wage earning households in the US (bottom 80%) has limped along based increasingly on debt spending, more credit card usage, more withdrawals from 401k and savings accounts, and more part time second job employment. Recent data show more than 50% of all 401k withdrawals, which are rising rapidly, are withdrawn just to pay monthly bills. Auto, student and installation debt continues to accelerate. Part time jobs have increased nearly five-fold since 2008. Meanwhile, corporations sit on more than $2 trillion in cash and justify their hoarding, instead of investing and creating jobs, referring to the lack of household consumption for their goods and services as main reason for their reluctance to invest and create jobs. The US economy limps along in a ‘stop-go’ trajectory, and most recently ‘stop’ instead of ‘go’ as government and business continue to cut spending.

The Wealthiest 1% Households Historic Income Gains

That inequality is most dramatically represented by the growth in the share of national income by the wealthiest 1% of households, on the one hand, and the decline in the share of national income for the bottom 80% and remaining 110 million plus US households, on the other—i.e. between those earning an average of $593,000 a year (top 1%) and those earning less than $118,000 a year (bottom 80%) with a median annual income of around $50,000.

With average annual incomes of $593,000 a year today, the wealthiest 1% of households in the U.S.—approximately 750,000 out of a total of more than 150 million families in the U.S.—receive about 24% of all income generated in the US every year, according to Nobel Prize winning economist, Joseph Stiglitz. That’s up from only 8% of total income in 1979. That’s a tripling of the wealthiest 1%’s annual share of total income over the last three decades since Ronald Reagan took office. Not since 1928, when the wealthiest 1% share of income reached 22%, has income inequality been as extreme as today. And income inequality continues to grow worse at an accelerating rate.

According to studies of IRS data by University of California economist, Emmanuel Saez, and others, during the Clinton years, 1993-2000, the wealthiest 1% households captured 45% of all the increase in US income growth. During the George W. Bush years, 2000-2008, they captured 65%. And in the latest year of available data, 2010, they captured 93%. So the top 1% recovered quickly from the recession. So did their corporations, from which the same 1% households obtain more than 90% of all their income in the form of capital gains, dividends, interest, rents, and other forms of ‘capital incomes’.

Corporate Profits and the 1%

Profits are the major conduit through which the wealthiest 1% incomes grow, redistributed to stockowners, bondholders, and senior executive managers in the form of capital incomes like capital gains, dividends, interest, rents, etc. And Corporate Profits have done extremely well the past three decades, since 2001 in particular, and especially since the Great Recession of 2007-09.

After three years of recession, by 2011 corporate profits in the US were higher than even in 2007 just before the Great Recession began, rising at the fastest rate in 31 years during the recession and immediately after in 2010-11.
Averaging an annual rate of increase of about 10% from 1948-2007, Pre-Tax Corporate profits virtually doubled from their recession 2008 low-point of $971 billion to $1.876 trillion by March 2011 less than a year and a half later—i.e. a level 28% higher than even their 2007 pre-recession record high of $1.460 trillion.

A subset of the $1.876 trillion, i.e. profits of the 500 largest US corporations, rose 243% in 2009-10 according to the Wall St. Journal. That’s 243% after averaging 10% a year during 1998-2007. Moreover, that 243% does not include profits of multinational US corporations hidden and sheltered in their offshore subsidiaries, which in 2012 were estimated at more than $1.4 trillion.

This record gain in pre-tax corporate profits since the onset of the economic crisis in 2007-08 was achieved not from the increased sale of goods and services, but from record profit margins from cost-cutting operations—i.e. by cutting jobs, by reducing wages, benefits, and hours of work, and by productivity gains pocketed by management and not shared with their workers. Profit margins since 2008, i.e. profits as a percent of operating costs, by 2011 thus attained the highest levels in more than 80 years.

Just as cost-cutting at the direct expense of workers has been the main factor in generating record pre-tax corporate profits, so too have Corporate After-Tax profits surged as a consequence of massive corporate tax cutting by governments at all levels, Federal as well as State and Local.

Major corporate tax cut legislation in 2004-05, new rules allowing faster depreciation write-offs (a form of tax cut), and disregard of enforcing the foreign profits tax under George W. Bush all resulted in a further surge in corporate after-tax profits in Bush’s second term, 2004-08. That was followed by hundreds of billions more in business tax cuts at the Federal level under Bush and Obama from 2008 through 2012.

State and local government taxes on business since 2008 have been falling especially fast, as a December 1, 2012 feature article by Louis Story in the New York Times abundantly pointed out. That article estimated the cost of business tax cuts to by State and Local governments at no less than an additional $70 billion a year not represented in the above profits figures.

As a result of the continuing corporate tax cuts since 2008 at all levels of government, Corporate After-Tax profits recovered even faster during the recent recession than did pre-tax corporate profits. From a 2008 low-point of $746 billion, in less than 18 months from the recession low, after tax profits rose to $1.454 trillion—i.e. a level of 47% higher than even their 2007 pre-recession record of $989 billion. In other words, after tax profits recovered twice as fast as pre-tax profits as a direct consequence of government business tax cutting during the recent recession.

Corporate cost cutting at the direct expense of labor resulted in record corporate pre-tax profits during the last decade and especially since 2008. Three decades of corporate tax cutting—intensifying since 2001 and continuing through the recent recession—resulted in even greater after-tax profit gains. But as corporate tax cutting has intensified so too has the cutting of taxes on recipients of capital incomes—i.e. capital gains, dividends, interest, rents, etc.

The Personal Income Tax has concurrently been reduced for the wealthiest 1% households, enabling the ‘pass through’ of ever larger magnitudes of corporate after-tax profits to the wealthiest 1% and permitting that 1% to retain ever greater amounts of those distributed corporate profits as a result of accompanying reductions in the personal income tax.

The reductions in the Personal Income Tax have occurred in various forms: the lowering of the top marginal tax rates, the raising of the income threshold at which the top marginal rates would apply, the reducing of capital gains and dividends tax rates even faster than for other forms of income of the wealthiest 1%, introduction of new forms of interest income taxed at lowest rates (e.g. carried interest), the IRS benign neglect of offshore tax sheltering by the wealthy, the proliferation of countless income tax loopholes benefiting the wealthy too numerous to recount.
The outcome has been the shift in income to the top 1%, from 8% in 1979 to the estimated 24% share of national income in 2012.

Income Decline for the Bottom 80%

But income inequality is a consequence not only of income shifting to the wealthiest households and their corporations. Income inequality is a ‘double edged’ sword. It is also the consequence of conditions and policies which have simultaneously reduced the real incomes of the bottom 80% households—i.e. those 110 million earning less than $118,000 annual income and most of whom earn less than $50,000—while simultaneously raising the incomes of the wealthiest and their corporations. Once again the nexus is Corporate America.

Policies and measures that have raised corporate profits in the US to record levels over the past three decades, and especially since 2001, are in many instances the same policies that have reduced income for the middle and working classes in America. A short list of the major causes would include:

1. De-unionization of much of the labor force and a consequent collapse in the union-nonunion wage differential
2. Free trade policies that have lowered wages for new export companies by 20% compared to higher paid jobs lost to imports.
3. Millions of jobs permanently lost to free trade from NAFTA, CAFTA, and others
4. Offshoring of high paying jobs by multinational corporations to Asia and beyond
5. Creation of a 40 million two-tier workforce of part time and temp workers, with 60% wages and virtually no benefits
6. Elimination of health care benefits for tens of millions, and reduction in benefit coverage and higher cost sharing for those remaining with benefits
7. Longer duration between adjustments of minimum wage legislation, and smaller progressive adjustments when they occur
8. Rising base level of unemployed as recessions occur more frequently, are deeper and longer in duration, resulting in job recovery longer and at lower pay
9. Management hoarding of all productivity gains without sharing in part with wages
10. Elimination of defined benefit pensions and replacement with minimal 401k plans
11. Exemption by government rule changes of millions of workers from eligibility for overtime pay
12. Rise in property tax, sales taxes, and other local government fees and charges as local government grants more and more tax cuts to corporations and businesses.
13. Indexation and rise in payroll tax contributions by workers
14. Reduction in paid leave time for vacations, holidays, sick leave, etc.

These and scores of other measures have resulted in a concurrent decline in working and middle class income, as profits of Corporations and income from capital simultaneously have risen. The heaviest impact has been on working class households earning annual income from $39,000 to $118,000 a year—virtually all of which is wage income—sometimes called the middle class.

According to the PEW Institute’s 2012 study, the share of total income for those households in that annual income range declined from 58% in 1983 to 45% in 2011. So what the top 1% households gained (16% share increase, from 8% to 24%), the middle class largely lost (13% share decline from 58% to 45%). In terms of wealth estimates, the middle class has lost 28% of its wealth in just the last two decades, whereas the top1% share of wealth has risen from 27% to 40%. The size of the middle class itself has declined, shrinking from 61% of adults in the US population at its peak to only 51% today.

The decline in income and wealth has been long term, increasing noticeably since 1980, accelerating since 2001, and continuing through the recent recession to the present day. Since 2008, households without a 4 year college education have been especially hard hit, with a significant -9.3% income decline at the median in less than four years. Older workers, age 55-64, and younger workers, age 25-34, have been similarly hard hit in terms of income decline; the former a -9.7% drop and latter a -8.9% drop. Even college degreed workers’ income has fallen by -5.9% since the so-called end of the recent recession in June 2009.

While some of the income decline is due to wage and benefit reductions by those who did not lose their jobs during the recent recession, much more of the relative income decline has been due to massive loss of jobs since 2007, which reached a level of 27 million at one point and still remain at 22 million after four years of so-called recovery. While more than 15 million jobs were lost, no more than 5 million have been ‘recovered’ since the recession began. Moreover, the jobs added during the recession have paid significantly less than the jobs lost, thus lowering income accordingly. According to a National Employment Law Project survey published in August 2012, 60% of the jobs lost during the recession were higher paying construction, manufacturing, and tech jobs, ranging between $13.84-$21.13 per hour. But only 22% of the jobs added since 2008 were in this range. In contrast, 21% of the jobs lost after 2008 were low paying, $7.69-$13.84, but the latter have been 58% of the jobs added during the recession. And the problem is not only short term and recession related. Since 2001, low wage jobs have grown 8.7% while higher wage jobs have decline -7.3%.

In summary, while corporate profits have continued to grow so too has the income of the top 1 wealthiest households. This has been made possible in large part at the expense of the middle and working classes, as rising corporate profits gained at workers’ expense are passed through to forms of capital incomes—the latter process accelerated by the reduction in both corporate taxation and personal income taxation for the wealthiest 1% households. The process began in earnest more than three decades ago under Reagan, continued under Clinton, accelerated under George W. Bush, and has remained under Obama during his first term. The consequence has been the growing—and accelerating—income inequality in America which is a major characteristic of the US economy in the 21st century.
It also explains in large part why the current US economic recovery has repeatedly relapsed on three different occasions since the formal end of the recession in June 2009, and will continue to do so in the future. While corporations, bankers, speculators, stock and bond traders, and the wealthiest households continue to experience significant long term income gains and have recovered years ago from the 2007-09 economic contraction, the rest of the populace remains plagued by an economy that has been simply ‘bouncing along the bottom’ now for four years.

Jack Rasmus

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US GDP and the GLOBAL ECONOMIC SLOWDOWN

February 15, 2013 by jackrasmus

The following is the Introduction to the full length article, US GDP and the GLOBAL ECONOMIC SLOWDOWN, that can be accessed and read in full on my website, http://www.kyklosproductions.com, accessible from the toolbar on the right side of this blog site.

INTRODUCTION:

Economic data reported in recent weeks show the global economy is slowing rapidly across all segments. Nearly the entire European Union, including its core economies of Germany, France, and the United Kingdom are all now clearly mired in recession. The Euro southern periphery is in a bona fide depression. Japan has entered its third recession since 2008. China, India, and Brazilian growth rates have fallen by half. And the US in the fourth quarter 2012 has come to a virtual economic standstill, the second time in two years in which a quarterly GDP recorded virtually no growth.

One consequence of the now clearly emerging new crisis is the global economy finds itself on a ‘tipping point’ and on the verge of a renewed ‘currency war’ that was temporary averted in 2010-11. Competitive currency devaluations are a sure sign of a qualitatively deteriorated economic state of affairs. During the global depression of the 1930s ‘devaluation by fiat’ played a key role in deepening and ensuring the duration of the depression. In 2010-11 the then incipient drift toward currency war took the form of driving down wages to gain a cost advantage for export sales. Today the driver is global quantitative easing, QE, policies that have been implemented and are intensifying by central banks around the world, from the US Federal Reserve, the Bank of England, the European Central Bank, Bank of China, and most recently, the Bank of Japan.

Capitalist policy makers globally have bought into the false idea that monetary policy—i.e. injecting massive amounts of liquidity into their respective banking systems—will stimulate recovery. Historically this has never worked, and it has not been working as well since 2008. Injecting money into banks, shadow banks, and speculators have resulted only in creating incipient bubbles in the stock markets, junk bond markets, and other financial securities. The real economies have benefited little if any from this form of stimulus.

Believing QE is the answer to recovery, the same policy makers have opted for a severe contractionary fiscal policy in the form of ‘austerity’ programs—massive cuts in public spending, mass layoffs and privatization in the public sector, and tax hikes on the middle class to offset the anticipated inflationary effects of the QE and money stimulus—inflation which has not appeared as deflationary forces continue to grow as the real economies of their countries continue to slow and stagnate. The dual strategy of capitalists politicians across the globe—of QE and money injections into the banks and financial system combined with austerity for the rest—has clearly failed and will continue to fail even more visibly.

Meantime, the global economy continues inexorably to slow, drifting toward the ‘double dip’ recession this writer has predicted on various occasions in the recent past, in my 2010 and 2012 published books (Epic Recession: Prelude to Global Depression, 2010, and Obama’s Economy: Recovery for the Few, 2012) and numerous articles in ‘Z’ magazine and elsewhere.

The locus of the debate on the near-term economic future in the US economy is now concentrated on whether the recent 4th quarter US GDP , which fell to -0.1%, is just an aberration and will be reversed in the first half of 2013 or whether it is a harbinger of a further slowdown. This writer’s view is that it is the latter, as has been predicted in a series of analyses of US GDP over the past five quarters, from the last quarter of 2011 through the last quarter of 2012’s recent GDP data.

Data now coming in for the US show that consumer spending on the holidays was noticeably weak except for auto sales driven by discounts. It is now weaker in 2013, as payroll taxes have risen, health insurance companies are gouging households with premium increases of 10-20%, gasoline prices are rising rapidly once more, and real disposable household income for 80% of families continues to decline. On the business spending side, business inventory accumulation is slowing rapidly, small business confidence is falling, forecasts of business operating revenue show a major slowing, productivity is collapsing, and export sales will decline as the currency war drives up the value of the US dollar in global markets. The remaining ‘engine’ of GDP, government spending, is also in reverse as the debates on ‘fiscal cliff: Parts 2 and 3’ and federal spending cuts continue and the states and cities continue to reduce spending and raise taxes. Nevertheless, polyannish mainstream economists continue to predict a rapid recovery from the 4th quarter GDP collapse into 2013—as they have erroneously for four years now.

What follows is this writer’s analyses of the details of GDP results for the past 15 months, that were published on his blog, jackrasmus.com, and other public blogs. The reports are in reverse chronological order, with the latest 4th Quarter 2012 US GDP first, followed by consecutive past quarters, concluding with the analysis of the 4th quarter 2011 GDP.

(go to the website, http://www.kyklosproductions.com, and click on the ‘articles’ tab on the top toolbar of the website.)

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Obama’s 2013 State of the Union Address: Tragedy Has Many Faces

February 13, 2013 by jackrasmus

Tonight, February 12, 2013, President Obama delivered his State of the Union address. He concluded with an emotional appeal for gun control, repeating a call for Congress to at least put the matter of gun control to a vote after referencing the Newtown, Ct., tragic massacre of 26 children and other recent acts of gun violence in the US. It was an emotional high point of his address, and a very moving moment.

But there was another reference in his speech that also addressed life and death matters, potentially impacting not 26 but hundreds of thousands of those other of America’s most vulnerable—our senior population.

Earlier in his address, Obama declared “the biggest cause of the nation’s long term debt” was “medical for the aged”, in other words, Medicare. Saying this, Obama repeated his remarks of January 1, 2013, when he publicly declared on TV, while supporting the agreement in Congress to raise token taxes on the wealthiest 1%, that Medicare was the biggest contributing source to the deficit and debt.

Reference to Medicare as the main cause of deficit and debt is of course blatantly false. As this writer has documented elsewhere in detail in several articles, the main causes of the $10 trillion additional run-up in deficits and debt since 2001 have been the Bush tax cuts ($3.4 trillion of the total), excess inflationary war spending ($2.1 trillion), tax cuts for the rich and corporations and other stimulus spending since 2008 ($3 trillion), and loss of tax revenue due to 5 years of more than 20 million still unemployed.

Obama’s fixation on Medicare as the prime target for deficit cutting is therefore disturbing. All the more so since he’s been calling for massive Medicare cuts for the past two years. To recall, last November he proposed $340 billion in Medicare cuts. And in July 2011 proposed $700 billion as part of a ‘grand bargain’. Massive cuts to Medicare have been on his mind for some time. But even more disturbing in his February 12 address was his statement that he agreed with and supported the Simpson-Bowles Deficit Commission’s 2010 proposals for cutting Medicare.

If you don’t know what Simpson-Bowles proposed back in November 2010 for reducing Medicare, allow me to enlighten you. Simpson-Bowles proposed a new $550 annual deductible for Part A (hospital) and Part B (physician) Medicare coverage. In addition to that $550, they also proposed that seniors now pay a 20% copay for Part A coverage as well as the present 20% copay for Part B coverage. Those seniors who can afford it, currently purchase additional supplemental private insurance to cover the 20% Part B copay. That typically costs from $150 to $300 a month. Presumably, the additional 20% copay for Part A would cost about the same additional $150 to $300 a month. So to keep their current part A hospital coverage they now have, seniors would have to pay out of pocket another $150 to $300 a month—in addition to the new $550 deductible for Part A & B.

The Simpson-Bowles proposal for Medicare means seniors will pay an additional $195 to $345 a month out of pocket for the same level of Part A and Part B coverage they now have.

The new $550 deductible means another $45 a month taken out of their monthly social security retirement checks, in addition to the current roughly $105 a month taken out for Part B coverage. That’s a major hit to monthly retirement checks from social security, which today averages only a mere $1100 a month. Plus the $150-$300 directly out of pocket for supplemental Part A insurance.

In short, that’s Simpson-Bowles. That’s what Obama called for. And that’s a financial disaster for tens of millions on Social Security-Medicare.

The other tragedy in Obama’s SOTU address was jobs. The proposals raised were rehashed old programs, like his September 2011 ‘jobs’ bill; more subsidies and tax breaks for multinational corporations and manufacturers; a token infrastructure spending proposal with no details; and a pre-school education proposal that was strangely offered as the first step toward a ‘job retraining’ bill.

The President also called for an Immigration bill, much needed no doubt. But that bill is currently being drafted in part by business interests, multinational tech companies in particular. As part of the immigration deal, multinational tech companies will be allowed to double the quota of jobs given to foreign skilled engineers from their offshore subsidiaries, raising the annual total of jobs under the H1-B visa program from current 65,000 to 130,000. So jobs will be created by the immigration bill, but not for American college youth, who are now being crushed under a mountain of student debt with little guarantee of a high paying job upon graduation. (And instead of expunging that debt in whole or part, as has been done for the banks these past five years, the President merely exhorted colleges and universities to stop raising annual tuition by double digit rates).

But the real jobs tragedy was President Obama’s proposal to conclude the nearly completed ‘Transpacific Partnership Program’—a euphemism for a pacific wide Free Trade on Steroids treaty that will dwarf the job loss impact of NAFTA since 1994 and preferred trade rights given to China since 2000. Those two major trade deals cost, at minimum, 5 million lost jobs. TPP will cost magnitudes more in terms of job loss. And that’s not all. Obama further called for replicating TPP Free Trade with a similar treaty with the European Union, a ‘TransAtlantic Partnership Program’, or TAP.

In summary, the State of the Union address last night, February 12, was proof, once again, that everything changes but nothing changes with the two parties in Washington. There is still no serious job creation program, only more free trade job destruction proposals and still more subsidies to multinationals and manufacturers. Meanwhile, if you’re long term unemployed and older than five years old, forget about job retraining. And if you’re a senior, expect to foot much of the deficit cutting bill through higher out of pocket payments for Medicare and thus fewer dollars in your social security retirement checks. And if you’re a student, expect to have to continue to pile on more debt in exchange for low paying service jobs when they graduate.

Dr. Jack Rasmus
February 12, 2013
Jack is the author of the 2012 book, “Obama’s Economy: Recovery for the Few”, published by Palgrave-Macmillan and Pluto press. His website is: http://www.kyklosproductions.com; his blog is: jackrasmus.com; and he can be reached on twitter at #drjackrasmus.

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‘Incomes, Jobs, and Obama’s 2013 State of the Union Address’

February 11, 2013 by jackrasmus

On Tuesday, February 12, 2013, President Obama will give his State of the Union address. Previews from the media in recent days indicate he will talk about job creation and the problem of income stagnation for the middle class. Neither of these issues—jobs and income—have been seriously addressed for more than five years since the start of the recent recession in December 2007. More than 20 million workers remain jobless and real income for middle class families has fallen, and continues to fall, for the past five years according various measures.

It is rumored Obama will call for a massive increase in Free Trade, specifically for a pacific-wide free trade agreement, the ‘Trans Pacific Partnership’ agreement that his representatives have been working on already for more than a year. Also in the works is a parallel Free Trade agreement with the entire European Union. If passed, these agreements will result in millions more lost jobs—not new jobs—and will make the more than 5 million jobs already lost to NAFTA free trade and China preferred trade pale in comparison. But it will be passed off as a ‘job creator’.

With regard to domestic job creation, it is rumored he will call for business to invest more in the US in order to create jobs here. It is not likely, however, the President will bother to mention the more than $2 trillion in cash US corporations are sitting on—or distributing to their stockholders to the tune of $500 billion last year—instead of creating jobs. Nor is it likely the President will mention that, according to latest Wall St. Journal surveys, big businesses plan to increase investment in 2013 by a mere 2%, down from 8% in 2012 and 20% in 2011. He will exhort them to do something more about investing and job creation, without saying what he himself will do if Business continues to sit on its massive cash hoard and lower investment still further.

The reason most frequently given by CEOs for not investing more in the US is that US consumers aren’t buying enough. True enough. Except for the wealthiest 10% households, median family consumer spending is lagging badly. Most of median household spending that is occurring is spending on credit—credit cards, installment loans, student loans—or spending from depletion of savings to cover escalating healthcare costs. Consumer spending based on real income gains is just not happening for the middle class. And that picture is about to get seriously worse very quickly in coming weeks, given the recent run-up in gas prices that will almost certainly exceed $5 a gallon this spring.
But Obama will talk about the need for income gains for the middle class, while remaining short on the specifics how that will occur; he’ll talk about the need for more jobs without offering specific programs except for more job-destroying free trade agreements. And while he’ll reference the key problem of falling real middle class incomes, specific solutions he plans will be conspicuously absent.

How important is the fact of stagnating and/or declining middle class incomes? The following are some of the more salient facts about income inequality trends in the US in recent decades and years; why those trends are growing worse; and why that inequality is a major factor in the now stagnating once again US economy and recovery.

The Wealthiest 1% Households Historic Income Gains

The dominant characteristic of the US economy today—and a fundamental cause of the faltering, stop-go economic recovery in the U.S. since 2009—is the long term and continuing growth of income inequality in America.
That inequality is most dramatically represented by the growth in the share of national income by the wealthiest 1% of households, on the one hand, and the decline in the share of national income for the bottom 80% and remaining 110 million plus US households, on the other—i.e. between those earning an average of $593,000 a year (top 1%) and those earning less than $118,000 a year (bottom 80%) with a median annual income of around $50,000.

With average annual incomes of $593,000 a year today, the wealthiest 1% of households in the U.S.—approximately 750,000 out of a total of more than 150 million families in the U.S.—receive about 24% of all income generated in the US every year, according to Nobel Prize winning economist, Joseph Stiglitz. That’s up from only 8% of total income in 1979. That’s a tripling of the wealthiest 1%’s annual share of total income over the last three decades since Ronald Reagan took office. Not since 1928, when the wealthiest 1% share of income reached 22%, has income inequality been as extreme as today. And income inequality continues to grow worse at an accelerating rate.

According to studies of IRS data by University of California economist, Emmanuel Saez, and others, during the Clinton years, 1993-2000, the wealthiest 1% households captured 45% of all the increase in US income growth. During the George W. Bush years, 2000-2008, they captured 65%. And in the latest year of available data, 2010, they captured 93%. So the top 1% recovered quickly from the recession. So did their corporations, from which the same 1% households obtain more than 90% of all their income in the form of capital gains, dividends, interest, rents, and other forms of ‘capital incomes’.

Corporate Profits and the 1%

Profits are the major conduit through which the wealthiest 1% incomes grow, redistributed to stockowners, bondholders, and senior executive managers in the form of capital incomes like capital gains, dividends, interest, rents, etc. And Corporate Profits have done extremely well the past three decades, since 2001 in particular, and especially since the Great Recession of 2007-09.

After three years of recession, by 2011 corporate profits in the US were higher than even in 2007 just before the Great Recession began, rising at the fastest rate in 31 years during the recession and immediately after in 2010-11.
Averaging an annual rate of increase of about 10% from 1948-2007, Pre-Tax Corporate profits virtually doubled from their recession 2008 low-point of $971 billion to $1.876 trillion by March 2011 less than a year and a half later—i.e. a level 28% higher than even their 2007 pre-recession record high of $1.460 trillion.

A subset of the $1.876 trillion, i.e. profits of the 500 largest US corporations, rose 243% in 2009-10 according to the Wall St. Journal. That’s 243% after averaging 10% a year during 1998-2007. Moreover, that 243% does not include profits of multinational US corporations hidden and sheltered in their offshore subsidiaries, which in 2012 were estimated at more than $1.4 trillion.

This record gain in pre-tax corporate profits since the onset of the economic crisis in 2007-08 was achieved not from the increased sale of goods and services, but from record profit margins from cost-cutting operations—i.e. by cutting jobs, by reducing wages, benefits, and hours of work, and by productivity gains pocketed by management and not shared with their workers. Profit margins since 2008, i.e. profits as a percent of operating costs, by 2011 thus attained the highest levels in more than 80 years.

Just as cost-cutting at the direct expense of workers has been the main factor in generating record pre-tax corporate profits, so too have Corporate After-Tax profits surged as a consequence of massive corporate tax cutting by governments at all levels, Federal as well as State and Local.

Major corporate tax cut legislation in 2004-05, new rules allowing faster depreciation write-offs (a form of tax cut), and disregard of enforcing the foreign profits tax under George W. Bush all resulted in a further surge in corporate after-tax profits in Bush’s second term, 2004-08. That was followed by hundreds of billions more in business tax cuts at the Federal level under Bush and Obama from 2008 through 2012.

State and local government taxes on business since 2008 have been falling especially fast, as a December 1, 2012 feature article by Louis Story in the New York Times abundantly pointed out. That article estimated the cost of business tax cuts to by State and Local governments at no less than an additional $70 billion a year not represented in the above profits figures.

As a result of the continuing corporate tax cuts since 2008 at all levels of government, Corporate After-Tax profits recovered even faster during the recent recession than did pre-tax corporate profits. From a 2008 low-point of $746 billion, in less than 18 months from the recession low, after tax profits rose to $1.454 trillion—i.e. a level of 47% higher than even their 2007 pre-recession record of $989 billion. In other words, after tax profits recovered twice as fast as pre-tax profits as a direct consequence of government business tax cutting during the recent recession.

Corporate cost cutting at the direct expense of labor resulted in record corporate pre-tax profits during the last decade and especially since 2008. Three decades of corporate tax cutting—intensifying since 2001 and continuing through the recent recession—resulted in even greater after-tax profit gains. But as corporate tax cutting has intensified so too has the cutting of taxes on recipients of capital incomes—i.e. capital gains, dividends, interest, rents, etc.

The Personal Income Tax has concurrently been reduced for the wealthiest 1% households, enabling the ‘pass through’ of ever larger magnitudes of corporate after-tax profits to the wealthiest 1% and permitting that 1% to retain ever greater amounts of those distributed corporate profits as a result of accompanying reductions in the personal income tax.

The reductions in the Personal Income Tax have occurred in various forms: the lowering of the top marginal tax rates, the raising of the income threshold at which the top marginal rates would apply, the reducing of capital gains and dividends tax rates even faster than for other forms of income of the wealthiest 1%, introduction of new forms of interest income taxed at lowest rates (e.g. carried interest), the IRS benign neglect of offshore tax sheltering by the wealthy, the proliferation of countless income tax loopholes benefiting the wealthy too numerous to recount.

The outcome has been the shift in income to the top 1%, from 8% in 1979 to the estimated 24% share of national income in 2012, and the accelerating accrual of all income gains by the top 1% noted previously in the opening paragraphs of this essay.

Income Decline for the Bottom 80%

But income inequality is a consequence not only of income shifting to the wealthiest households and their corporations. Income inequality is a ‘double edged’ sword. It is also the consequence of conditions and policies which have simultaneously reduced the real incomes of the bottom 80% households—i.e. those 110 million earning less than $118,000 annual income and most of whom earn less than $50,000—while simultaneously raising the incomes of the wealthiest and their corporations. Once again the nexus is Corporate America.

The heaviest impact has been on working class households earning annual income from $39,000 to $118,000 a year—virtually all of which is wage income—sometimes called the middle class.

According to the PEW Institute’s 2012 study, the share of total income for those households in that annual income range declined from 58% in 1983 to 45% in 2011. So what the top 1% households gained (16% share increase, from 8% to 24%), the middle class largely lost (13% share decline from 58% to 45%). In terms of wealth estimates, the middle class has lost 28% of its wealth in just the last two decades, whereas the top1% share of wealth has risen from 27% to 40%. The size of the middle class itself has declined, shrinking from 61% of adults in the US population at its peak to only 51% today.

The decline in income and wealth has been long term, increasing noticeably since 1980, accelerating since 2001, and continuing through the recent recession to the present day. Since 2008, households without a 4 year college education have been especially hard hit, with a significant -9.3% income decline at the median in less than four years. Older workers, age 55-64, and younger workers, age 25-34, have been similarly hard hit in terms of income decline; the former a -9.7% drop and latter a -8.9% drop. Even college degree workers’ income has fallen by -5.9% since the so-called end of the recent recession in June 2009.

While some of the income decline is due to wage and benefit reductions by those who did not lose their jobs during the recent recession, much more of the relative income decline has been due to massive loss of jobs since 2007, which reached a level of 27 million at one point and still remain at 22 million after four years of so-called recovery. While more than 15 million jobs were lost, no more than 5 million have been ‘recovered’ since the recession began. Moreover, the jobs added during the recession have paid significantly less than the jobs lost, thus lowering income accordingly. According to a National Employment Law Project survey published in August 2012, 60% of the jobs lost during the recession were higher paying construction, manufacturing, and tech jobs, ranging between $13.84-$21.13 per hour. But only 22% of the jobs added since 2008 were in this range. In contrast, 21% of the jobs lost after 2008 were low paying, $7.69-$13.84, but the latter have been 58% of the jobs added during the recession. And the problem is not only short term and recession related. Since 2001, low wage jobs have grown 8.7% while higher wage jobs have decline -7.3%.

In summary, while corporate profits have continued to grow so too has the income of the top 1 wealthiest households. This has been made possible in large part at the expense of the middle and working classes, as rising corporate profits gained at workers’ expense are passed through to forms of capital incomes—the latter process accelerated by the reduction in both corporate taxation and personal income taxation for the wealthiest 1% households. The process began in earnest more than three decades ago under Reagan, continued under Clinton, accelerated under George W. Bush, and has remained under Obama during his first term. The consequence has been the growing—and accelerating—income inequality in America which is a major characteristic of the US economy in the 21st century.

But don’t expect to hear anything specific or concrete from the President how he proposes to reverse the continuing deterioration in middle class income. What he’ll likely say is you don’t have enough income because you don’t have enough education, so go out and get more and take on even more student debt. And he’ll say the way to stimulate investment and jobs is to pass more Free Trade treaties that will destroy millions more jobs. Or pass the Immigration bill, much of which is being drafted right now by big tech companies to ensure they can hire hundreds of thousands more H-1B visa workers from their offshore subsidiaries. Or propose to create ‘green’ jobs by giving the ‘greenlight’ to natural gas fracking and pipeline construction throughout the US. But none of that will solve the problem of more than 20 million still jobless, or the fact that jobs that have been created are low pay, part time, temp, non-union service jobs with little or no benefits—that is, jobs that do little to resolve the even deeper problem of stagnating middle class incomes.

Jack Rasmus
February 11, 2013

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Defense Cuts and the March 1 Sequester Deadline

February 10, 2013 by jackrasmus

Tune into my upcoming Wednesday, February 13 radio show, ‘Alternative Visions’, on the Progressive Radio Network, 2pm eastern time, at http://prn.fm/shows/political-shows/alternative-visions/#axzz2KZKa7AQX.

I and my guests (Mike Eisenscher of US Labor Against War & Mike Prokasch of the New Priorities Movement) will be discussing the current maneuvers in Washington by Teapublicans and Timidcrats to delay and decrease the scheduled Defense Spending cuts due March 1 as part of the 2011 $1.2 trillion sequestered deficit cuts. Hear what others are doing to oppose the emerging deals by politicians in DC to reduce or even eliminate the Defense cuts, and what you can do to help as well. Fewer defense spending cuts now mean more non-defense (medicare, education, etc.) spending cuts later.

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US GDP–2012 and 2013

February 6, 2013 by jackrasmus

Tune in to my weekly radio show, Alternative Visions, today (wed. 2pm est and archived) for my discussion of US GDP numbers for 4th quarter 2012 showing a negative -0.1% drop, and my analysis of prospects for GDP in the 1st and 2nd Quarter 2013 in the US. Is a double dip recession in the works? The show is available on the progressive radio network, PRN.FM, called Alternative Visions, at this url: http://prn.fm/shows/political-shows/alternative-visions/#axzz2K5w5xy34

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US GDP–On the Road to Double Dip?

January 30, 2013 by jackrasmus

US GDP data released on January 30, 2013 for the fourth quarter 2012 showed a decline in GDP of -0.1% for the last three months of 2012, thus raising the specter of the US economy, facing still further deficit spending cuts in 2013 amidst declining consumer confidence, may be on track for a possible double dip recession in 2013 or 2014 along with other economies in Europe, the UK, and Japan.

In the fourth quarter GDP numbers, government and business inventory spending led the decline. To the extent consumer spending played a positive role at all in the 4th quarter, it was largely driven by auto sales—stimulated by auto dealers offering buyers deep price discounts, virtually free credit with near 0% auto loan interest rates, as well new auto purchases in the northeast as a result of Hurricane Sandy’s destruction of existing auto stock. 2012 Holiday season retail sales data, in contrast, were otherwise not particularly notable and would have been much worse without the auto sales exception. How much longer auto companies can continue the deep price discounts and free credit remains a question going forward. Net export sales continued to sag in the last quarter, as the slowdown in world manufacturing and trade continued. And, as others have noted, an important source of past consumer spending and GDP growth—i.e. health care services—began to slow ominously at the end of 2012 as well, promising to continue that trend into 2013.

This weak scenario in the fourth quarter 2012, and the virtual absolute stop to US economic growth, was predicted on this writer’s and other public blogs in a piece entitled “US 3rd Quarter GDP: Short Term Myopia vs. Long Term Realities” last October 2012 (see jackrasmus.com, as well as in this writer’s April 2012 book, ‘Obama’s Economy: Recovery for the Few’).

Last October 2012, it was noted that the 3% growth rate in the preceding 3rd quarter, July-September 2012, period was artificially produced by record levels of one-quarter federal defense spending accounting for more than one third of total GDP growth in the quarter. That government spending surge was preceded by more than two years of federal government spending reductions, and thus the third quarter defense-government spending acceleration represented previously held back government spending, to be released right before the November 2012 elections. It was predicted in the above blog commentary on GDP 3rd quarter results that government spending therefore would decline sharply in the following fourth quarter—which it did. It was further noted business inventory spending was on a track to decline as well in the fourth quarter, and that US net exports, having turned negative in the third quarter, would continue to decline in the fourth quarter—all of which also occurred in the latest GDP report. The true US GDP growth trend for July-September was therefore not the 3% reported, but only around 1-1.5% for the third quarter when the appropriate adjustments are made. And that 1.5% or so been the average GDP rate for more than two years. Then the bottomed dropped out in the fourth quarter, as GDP collapsed to -0.1%.

So what’s going on? Is the fourth quarter GDP an aberration? A temporary one time event? Or a harbinger of a still further slowing US economy, moving more in line with global economic trends indicating a slow but steady further slowdown?

In the first quarter 2013, a number of negative developments in the fourth quarter will likely continue, along with new negative developments, together suggesting the first quarter 2013 GDP will at best look much like the fourth quarter—and could even prove worse.

First, more than $100 billion has been taken out of the economy with the end of the payroll tax cut last January 1. Second, consumer sentiment and spending is showing a definite sharp decline in the early months of 2013. Deficit cutting will intensify with a deal on the ‘sequestered’ $1.2 trillion agreement that will occur in March in Congress. Defense spending cuts projected will be reduced, but non-defense spending will occur and perhaps even rise. Consumer spending on autos, which has been a plus in 2012, cannot continue at the prior pace. Health care spending will likely continue to slow, as health insurance premiums of 10-20% continue to be imposed in the new year by price gouging health insurance companies looking to maximize their returns in 2013 in anticipation of Obamacare taking effect in 2014. Business spending that occurred in the fourth quarter to take advantage of tax laws will almost certainly slow in the first quarter. Industrial production and manufacturing will add little, if anything, to the economy and housing will contribute to growth through apartment construction. In short, the scenario is one of continued very slow growth.
It is not the deficit that faces a ‘cliff’; it is the US economy. As this writer has repeatedly written since last November, the ‘fiscal cliff’ was mostly an economic farce. Real forces were further slowing the real US economy. Those real forces are once again reasserting themselves. However, should Congress proceed with continued deep spending cuts in 2013, should the Euro economies, UK, and Japan continue to weaken, and should China-India-Brazil not succeed in reversing their economic slowdowns significantly—then the odds of a double dip in the US will rise still further in 2013-14, as this writer has repeatedly predicted.

The strategic question is ‘Why is the US economy so fragile and weak? Why has it been unable to generate a sustained economic recovery from ‘Epic’ recession since 2009? Why now, after five years since the onset of recession in late 2007, has the US economy stagnating and collapsed to virtually zero growth, once again? ‘
The answers to this are not all that difficult to understand. First, despite $13 trillion in free, no interest money given to banks, investors, and speculators by the US federal reserve for five years now, the banks still continue to dribble out lending to small-medium US businesses. No loans mean no investment mean no hiring mean no income growth for consumption, which is 70% of the economy. Similarly, large non-bank corporations continue to sit on more than $2 trillion in cash. Like the banks, they too refuse largely to invest in the US to create jobs, preferring hold the cash, or use it to buyback stock and pay shareholders more dividends, to invest it offshore, or to invest it in speculating with financial instruments like derivatives, foreign exchange, commodities futures, and the like.

At the same time, the bottom 80% of households, more than 110 million, are confronted with 5 years now of continuing real disposable income stagnation or decline. This income stagnation and decline translates into insufficient income to stimulate consumption spending, which makes up 71% of the US economy. What spending exists is fundamentally credit driven, not income driven. Thus car loans, student loans, credit cards, and installment loans rise and with it household ‘debt’.

The problem with the US economy therefore is fundamentally twofold: not only insufficient income but growing household debt. Together they result in consumption becoming increasingly ‘fragile’ (an income to debt ratio term), and therefore unable to play its historic role of generating a sustained economic recovery. Together, fiscal-monetary policies are rendered increasingly ‘inelastic’ in generating recovery as ‘multipliers’ collapse—to use economic jargon. The outcome of all this is ‘stop go’ recoveries, bumping along the bottom, or what this writer has called an ‘epic’ recession.

by Dr. Jack Rasmus, copyright 2013

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The Collapse of the Retirement System in America

January 30, 2013 by jackrasmus

Readers of this blog are invited to listen to the archive of my radio show, ALTERNATIVE VISIONS, today, Wednesday, January 30, on the progressive radio network, online at http://prn.fm/shows/political-shows/alternative-visions/#axzz2JUEKrJbp.

The show addresses the deteriorating condition of the 6 elements of income for retirement: defined benefit pensions, 401ks, personal savings, retiree health benefits, social security and medicare. Here’s the announcement of the show with more detail:

The discussion will look at the 6 elements of the retirement system in the US: Private defined benefit pensions, 401k plans, personal savings, retiree health benefits, social security, and medicare. The retirement system in America set up in the late 1940s-early 1950s originally called for a ‘3-legged stool’ of incomes, composed of one-third retirement income from defined benefit pensions, one third from personal savings, and one third from social security. The first two of those legs have already collapsed. And now Congress is about to begin breaking the last leg, social security and medicare, with its upcoming deficit cuts. This will intensify as Congress restores defense spending cuts previously scheduled, and enacts big corporate tax cuts later in the year. The consequences of collapsing retirement incomes affecting 70 million people will be significant, Dr. Rasmus argues, and will hold back anyk sustained economic recovery in the US in 2013-14 and beyond, as GDP data for the fourth quarter 2012 just issued today show the US economy may have already entered the ‘double dip’ recession Dr. Rasmus has been predicting for more than a year.”

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From Fiscal Cliff to Debt Ceiling Debacle 2.0′

December 31, 2012 by jackrasmus

COMMENTARY: THE FOLLOWING IS THE LATEST DECEMBER 31 UPDATE TO THE TERMS OF THE FISCAL CLIFF PENDING DEAL IN CONGRESS.

In a press conference concluded today, December 31, 2012, just hours ago, President Obama reported a partial agreement on the Fiscal Cliff was very near.  To hold a conference and report such at this stage, means the major sticking points have been settled and just the details are now being worked out.

The agreement, as this writer has been predicting, will be only a partial one. Fiscal cliff (aka ‘Austerity American Style’) negotiations on unresolved matters will continue for the next several months.

According to today’s press conference by the President, the agreement about to happen today will reportedly include the following main elements: first, an extension of the tax cuts for roughly 98% of households. Tax rates on the 2% will apparently rise. So too apparently will payroll taxes rise back to their 6.2% rate. In a concession to Republicans, the tax cuts will now be made permanent instead of having an expiration date, as has been the case since 2001, and the cutoff for the top 2% will be raised from $250k income per year to $450k, thus making the increase on the top 2% in effect a tax hike on the top roughly 1.5% instead of top 2%. Second, the partial deal will include an unspecified extension of unemployment insurance benefits. Not part of the deal, however, are cuts involving the approximate $1.2 trillion in sequestered defense and non-defense spending, agreed to last August 2011, which are scheduled to start taking effect this January 1, 2013. However, there is also talk that the sequestration will be postponed for two months as part of the deal. Nor is there a settlement of the debt ceiling issue as part of the pending deal.

The agreed upon deficit reduction target of $4 trillion over the coming decade is not resolved by the pending agreement. The tax hikes on the 1.5% will provide only $600 billion in additional tax revenue for the coming decade. That amount, by the way, is well below Obama’s previously offer a few weeks ago of tax revenue generation of $1.2 trillion, and Boehner’s earlier December counteroffer of $1 trillion. To get some kind of partial agreement, Obama in effect reduced his tax revenue demand in half, from $1.2 trillion to $.6 trillion, raised the cutoff from $250k to $450k, and agreed to make the tax cuts permanent. Republicans thus get a reduction of $400 billion below their last $1.0 trillion position plus a $200k increase in the cutoff to $450k. Both those points amount to major ‘wins’ for the Republicans. Nonetheless, there is consequently still a long way to go in deficit cutting negotiations, which will occur over the next two months. In short, deficit cutting has not concluded; it has only just begun. And Republicans will be in an even stronger bargaining position going forward.

The focus from this point will be even more heavily on spending cuts and the Republicans will have the upper hand in spending cut negotiations for the following two reasons: the tax issue is largely out of the way and the debt ceiling coming up allows them, the Republicans in the House, to once again engineer a repeat of the debt ceiling debacle of August 2011. We are now headed toward a ‘Debt Ceiling Crisis Redux’, which will peak sometime in late February-early March 2013. The original debt ceiling debacle of August 2011, to recall, resulted in all spending cuts of $1.2 trillion. Version 2.0 will almost certainly result in something similar, with perhaps a couple hundred billion more in token revenue generation, if even that. Expect spending cut proposals approaching twice that $1.2 trillion agreed upon in August 2011.

The August 2011 debt ceiling deal amounted to a ‘trade off’ by Obama and the Democrats of $1.2 trillion in spending only reduction in exchange for an agreement from the House radical Republicans not to play the debt ceiling card until after the November 2012 negotiations. It’s likely another such deal will occur—i.e. Democrats trading spending cuts for a halt to debt ceiling brinkmanship by the Republicans until after the 2014 midterm elections.

In terms of bargaining strategy, Obama and the Democrats are cutting a deal today, December 31, that will prove disastrous for them over the coming months. They have conceded on several major points just to try to get an agreement today—i.e. $600 billion in total revenue, $450k cut off increase, and making cuts permanent.  Republicans will get several more ‘bites at the tax apple’ in coming months to offset the tax hikes on their 1.5% richest friends.  In addition, Democrats are passing their bargaining leverage to the Republicans. Democrats should have allowed the fiscal cliff to happen, then later this week proposed a 98% tax cut for the middle class and tied that to a proposal for no debt ceiling brinksmanship for the next two years. Republicans would have been put in the position of having to vote AGAINST a middle class tax cut to keep their debt ceiling leverage. They no doubt realized this and, as this writer has previously predicted. Republicans conceded little in order to retain their debt ceiling leverage for future negotiations.

To sum up, in today’s pending deal, the House Republicans get a $600 billion concession by Obama in total tax revenue generation, a bigger hammer in the debt ceiling, an increase in the threshold for the top 2%, from $250 to now $450k a year (reducing the top 2% to in effect 1.5%), making the tax cuts permanent, and greater future control of the debate agenda. Obama and the Democrats get a continuation of middle class tax cuts, some kind of unemployment insurance, and a loss of bargaining leverage for the next phase of continuing deficit reduction negotiations.

The second phase of fiscal cliff negotiations will focus on reducing sequestered defense cuts, more emphasis on cutting social security, Medicare, Medicaid and the like, and a return to playing chicken and brinksmanship once again on the debt ceiling. Republicans now have the bargaining agenda where they want it: almost totally focused on spending cuts. And they have their big stick again to whip the Democrats with—i.e. the debt ceiling.

Jack Rasmus

Jack is the author of the April 2012 book, “Obama’s Economy: Recovery for the Few”. Chapter 7 of that book, ‘Deficit Cutting on the Road to Double Dip Recession’, is available for free on his website, http://www.kyklosproductions.com. Visit the website also for Jack’s 7 recent radio interviews on the fiscal cliff negotations, at http://www.kyklosproductions.com/interviews. For updates daily on the fiscal cliff negotiations, follow Jack at twitter, #drjackrasmus.

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Fiscal Cliff: Obama & Senate vs. House Radicals–Another Step Closer to Deal

December 29, 2012 by jackrasmus

Late Friday afternoon, December 28, President Obama held a press conference reporting on the status of negotiations on the so-called ‘Fiscal Cliff’. Having met with House and Senate Democrat and Republican leaders earlier the same day, in his press conference Obama reported both sides had made progress during the day toward an eventual deal. Senate leaders Reid and McConnell were in fact working on an agreement as he spoke, Obama noted.

Whatever Senate leaders Reid and McConnell may work out will almost certainly come to a Senate vote by December 31st. Less certain is whether the House of Representatives will allow a vote on the same Senate package to be taken by then as well. An ominous indication of what the details of the Senate version might be were hinted by Obama during his press conference, as he indicated the deal would require “the wealthiest to pay a little more” and that spending would be cut “in a responsible way”. Watch for an emphasis on ‘little’ with regard to taxes, and on ‘responsible’ meaning major spending cuts.

Should the House balk at voting on the forthcoming Senate proposal, Obama noted he was prepared to have Senate Democrat leader, Harry Reid, introduce a second bill, the outlines of which he, Obama, suggested before the Xmas holidays. That alternative bill would reintroduce the tax cuts for the 98% earning less than $250k a year, pass an extension of unemployment insurance, as well as other unspecified economic growth measures.
The first package being developed this weekend in the Senate by Reid-McConnell will not come up for a vote in the Senate until Monday, December 31. The House will then either vote it up as well or refuse to vote. If the latter, then the Obama-Reid backup proposal will likely come up for a vote on it on January 2 or 3. At that point, the Bush tax cuts will have expired officially. That means the vote on the tax cuts for the 98% will be a vote to reintroduce and pass the 98% tax cuts. House radicals who might refuse to vote on the Senate’s initial December 31 proposal—in which tax cuts for the wealthiest 2% aren’t extended—might then find themselves in the difficult position of NOT voting for reintroducing tax cuts for the 98%. This possibility will almost certainly force the House radicals to vote for the Senate’s first version on the 31st, especially if that Senate version includes major cuts in spending for social security, Medicare, Medicaid and the like, and ‘smoke and mirrors’ tax revenue hikes on the 2%. In short, the House radicals now find themselves ‘boxed in’, as Obama doubles down on them.

Metaphorically, they have jumped out of Boehner’s ‘Plan B’ frying pan proposal of last week, onto the hot stove of Obama’s double down proposal announced today. Watching them ‘hot step it’ to an eventual deal may prove entertaining.
As this writer has predicted since November, a deal will be concluded between the two wings of the ruling party of Corporate America. That deal will come in three stages: the first a partial settlement to get through the January 1, 2013 artificial deadline to show the ‘markets’ (e.g. Investors, speculators and corporate America) that a deal is being hammered out, albeit in stages. The second stage negotiations will commence immediately after next week on additional items, continuing through February to March 2013. And a final third stage will come later this year, involving a major revision of the US tax code that will result in big corporate tax rate cuts.

AN ALTERNATIVE ‘ONE TAX’ SOLUTION

While this ‘dance’ of negotiations plays out over the next week, readers should consider that the entire ‘Fiscal Cliff’ charade could be resolved with one program, one proposal involving taxation on the wealthiest 1% of US households—i.e. those whose average annual income is about $1.5 million and whose effective and actual income tax rate today is not the nominal 35% but in fact only about 22.5%.

The very wealthy 1% actual income tax rate has never been the 35% top rate. In 1980 that top rate was 70% but the actual effective rate they paid was only 45%. Similarly, today the reported top rate is 35% but the actual rate on average 22.5%. Some hedge fund managers making billions a year actually pay less than 10%.

University of California professor, Emmanual Saez, and his colleagues, Thomas Picketty and Stefanie Stantcheva, a few months in the third quarter 2012 issue of ‘Tax Justice Focus’, estimated that by simply making the wealthiest 1% pay the same effective, actual tax rate they paid in 1980 (45%) it would raise an additional $405 billion a year in tax revenue. Over a decade, that’s more than $4 trillion—which is coincidentally the amount identified as necessary to reduce the deficit over the coming decade by all the parties, Democrat and Republican, as the deficit cutting target amount. Since the Simpson-Bowles report of November 2010, the target has always been $4 trillion.

Thus, one simply tax measure would solve the entire fiscal cliff issue, generate the $4 trillion in deficit reduction, allow all the other tax cuts in question to continue, and require no cuts whatsoever in social security, Medicare, Medicaid or anything else.

Professors Saez and others estimated this $405 billion on an assumption of a GDP of $15 trillion in 2011. Today’s $16.5 trillion GDP means this one tax measure would now raise more than $450 billion a year. The 45% tax on the richest 1% amounts to a 2.7% increase in government tax revenue as a percent of GDP. If you think that is too much, consider that federal tax revenues as a percent of GDP was 20.6% in 2000 before George W. Bush began his investor-corporate tax cuts in 2001. That 20% had been the average for a number of years. But after Bush’s two recessions, his $3.4 trillion in tax cuts, his wars, runaway health care costs, and the historic weak recovery of the US economy under Obama since 2008, federal tax revenue as a percent of GDP had fallen to 14.4% from the 20.6% of only a decade or so ago. So taxing the 1% at the 1980 effective rate raises tax revenue as a share of GDP by 2.7%, to about 17%. Taxes can and should be raised on Corporate America as well, to get back to the 20%.

But don’t count on the latter, since Obama has promised throughout the election campaign to cut corporate tax rates from the current 35% to 28%. And don’t be surprised by the major spending reductions that will come out of current fiscal cliff negotiations, in the next few days and continuing throughout this year. Fiscal Cliff is only a cover phrase for what amounts to ‘Austerity American Style’.

The problem with the US deficit and debt is not a spending program problem. It has always been overwhelmingly a tax cut for the rich and corporations problem. And it can be resolved with one program and proposal to ‘make the millionaires pay 45%’. It’s that simple.

Jack Rasmus

Jack is the author of the 2012 book, “Obama’s Economy: Recovery for the Few” , and host of the weekly radio show, Alternative Visions, on the Progressive Radio Network, PRN.FM. His website is http://www.kyklosproductions.com, his blog, jackrasmus.com, and twitter handle #drjackrasmus.

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